Looks like Harrisburg, Pa. will make its Sept 15 payment due to a last-minute bailout from the state.

So the next time they will be in crisis mode will be January, I think. When there's another bond payment to be made - I think that one is a special purpose bond related to the money-losing incinerator.

The mystery, you may ask, is why anyone would be willing to lend money to L.A. or Detroit. They are, after all, not known for their fiscal responsibility. The answer is that a series of artificial legal, tax, and regulatory incentives lured investors into thinking that lending to bankrupted cities would be profitable (in pretty much the same way that government incentives led banks to lend money to people who should never have been able to borrow that much to buy a house).

In this case, it is the stable and tax-free nature of muni bonds that explains why we have seen investors pouring their money into municipal debt in recent years. We are talking billions of dollars here: According to the Investment Company Institute, $84 billion went into long-term municipal bond mutual funds in 2010, and about $69 billion in 2009. The 2009 level represents a 785 percent increase from the 2008 level of $7.8 billion.

Looks like Harrisburg, Pa. will make its Sept 15 payment due to a last-minute bailout from the state.

So the next time they will be in crisis mode will be January, I think. When there's another bond payment to be made - I think that one is a special purpose bond related to the money-losing incinerator.

Rendell advanced the city state aid ... but we may not have to wait until January for them to get into crisis mode.

Pennsylvania’s capital city of Harrisburg, faced with $43 million in bond payments due before year-end, rejected a state-funded financial adviser and plans to seek advice on entering bankruptcy court protection.

The City Council’s 5-2 vote last night to hire bankruptcy advisers resisted a personal plea from first-year Mayor Linda Thompson. Harrisburg needed state aid two weeks earlier to avoid becoming the second-largest borrower to default on a general- obligation bond this year.

“The whole world is watching Harrisburg,” Thompson said in a 40-minute speech to the council, where she sat until becoming mayor in January. “Our bondholders are looking to make us the poster child of the world to municipalities in financial difficulties. And they don’t plan on losing.”

Harrisburg, with 47,000 residents, has missed about $8 million in debt-service payments this year on more than $200 million of bonds issued in connection with a trash-to-energy incinerator. The seat of the sixth most-populous U.S. state’s government faces lawsuits over the debts from its home county of Dauphin and Assured Guaranty Municipal Corp., a bond insurer.

Councilor Brad Koplinski, who proposed considering bankruptcy and voted in favor of hiring advisers, said it would take a “devastating tax increase” to cover the debts.

Bankruptcy Not Fatal

“I’m not going to have that $210 million payment on the backs of taxpayers,” he said in an interview after the vote. “Bankruptcy, I don’t think, would kill our city. I think the tax increases would kill our city.”

Council President Gloria Martin-Roberts said she feared that bankruptcy would prompt retaliation from Hamilton, Bermuda- based Assured Guaranty and holders of the debt.

“I’m very concerned that bondholders are going to get sick and tired of what they think is a shell game, and lower the boom on us,” said Martin-Roberts, who voted against the proposal to hire bankruptcy advisers.

“Assured Guaranty is probably a little less assured today than they were a little earlier in the day,” Chuck Ardo, a Thompson spokesman, said after the vote.

The company is “disappointed” with last night’s vote, Betsy Castenir, an Assured spokeswoman, said by e-mail. The company backs some of the debt connected with the incinerator, owned by the independent Harrisburg Authority.

‘Inability’ to Cooperate

“The City Council has once again demonstrated its inability to work with the mayor to take concrete steps to develop a restructuring plan that allows the city and the authority to meet their obligations to bondholders, AGM and the county,” Castenir said.

Should Harrisburg seek bankruptcy, it would be only the second community in the state to do so. Westfall Township, in northeastern Pennsylvania’s Pike County, entered Chapter 9 court protection last year in the face of a $20 million legal judgment, about 20 times the town’s annual budget. The case was resolved earlier this year.

Under the resolution voted on in Harrisburg, the city may seek state oversight and technical assistance from Pennsylvania in lieu of bankruptcy, under the so-called Act 47 program set up to help financially troubled communities regain stability.

In February, Harrisburg’s credit rating was cut to B2, five levels below investment grade, by Moody’s Investors Service. The company said the city’s strategy for managing the incinerator debt was “weak” and raised prospects for default. The firm no longer rates Harrisburg debt, according to spokesman John Cline.

Accelerated State Aid

The city notified bondholders Aug. 30 that it didn’t have the funds to make $3.3 million in payments due Sept. 15 on its 1997 Series D and 1997 Series F bonds. The payments were made after Governor Ed Rendell accelerated $3.6 million in state aid.

For the third time this year, the city won’t be able to make a $637,500 installment payment due Oct. 1 on a loan from Covanta Holding Corp. of Fairfield, New Jersey, Thompson said in an interview. Covanta runs the city incinerator.

Meanwhile, Automatic Data Processing Inc. of Roseland, New Jersey, the city’s payroll processor, agreed to produce paychecks even though it hasn’t been paid $13,000 for prior work, the mayor said. That averted the prospect that Harrisburg workers won’t be paid today, Thompson said.

If they know there's no way they can pay the debts, they might as well file for bankruptcy ASAP. Jefferson County, Alabama pissed around with this 2 years ago and decided to do nothing, and now the sewer district [the $3.2 billion millstone around the county's neck] is under receivership - which likely means much higher sewer rates for the citizens here [and they're already paying some of the highest rates in the nation] and largely ensures the county is stuck for the bill.

The municipal bond market, once a quiet corner of Wall Street, is slowly becoming a scene of scandal and regulatory inquest. The Securities and Exchange Commission recently accused New Jersey of giving fraudulent information about its finances to municipal bond investors. The SEC is investigating officials in Miami for similar problems. The rate of municipal bond defaults—roughly $3 billion per year—is triple the usual pace, and analysts say many more bonds are on the brink because of the weak economy and low tax collections.
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At the core of the problem are questions about how governments manage pension funds, what investors know, and when they know it. The case against New Jersey revealed that the state has made unfunded pension fund promises to its employees, and compounded the problem by not being forthright with bond investors. (The state settled without admitting wrongdoing.) In this case, the contrast between the corporate and municipal markets could not be sharper.
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1. Congress must force states and other public agencies to admit their pension problems in timely, audited, plain-English reports using standards similar to those used by corporate pensions.

2. The SEC has the power it needs to enforce securities laws—except when it comes to the municipal bond market. For this reason, Congress should repeal the 1975 Tower Amendment, which prevents the SEC from having the same regulatory authority over the muni bond market that it has over its corporate counterpart. Such a repeal would allow the SEC to require that municipal bond offering documents be similar to those in corporate offerings, that governments follow uniform accounting standards defined by an independent board, and that ratings agencies apply the same standards to government and corporate debt instruments.

3. Even within its limited existing authority, the SEC should be more aggressive. The New Jersey case, for example, was resolved with no fines and without disclosure of the names of those responsible.

4. Congress should require that public pension fund boards adopt the same governance principles as companies. This would include greater disclosure and a majority of independent board members who can fulfill their fiduciary responsibilities to the employees in the plans. While neither of us regards corporate pensions as a picture of health, at least retirees, regulators, and investors are regularly updated on their condition, and companies are routinely forced to fund future benefits as market conditions change. That comes out of a truly independent audit.

5. Finally, states and localities should be permitted to sweeten benefits only if they agree to fund them fully. That will keep politicians from making more promises they can't keep.

Number 5 is silly.

Were they paying attention previously? When other benefits were sweetened, in most of the cases the public story given by the politicians/unions was not that they wouldn't fully fund the promises. It was "We can afford this! It won't affect our funded status. Swear, cross our hearts. Hope to die."

There's no meaning to 5.

I could criticize some of the other items, but number 5 is the easiest.

Historically, the federal government hasn’t bailed out states and cities facing default. But the European Union’s rescue of Greece and the exceptional depth of the recent recession just might change that. Two possible structures for bailouts are budget-avoiding federal guarantees and regulation-bending Federal Reserve bond purchases. Either way, politics may make rescues hard to resist.

Any such action would create huge controversy over constitutional principles of state sovereignty and responsibility. It would also create a potentially hazardous precedent. But that doesn’t make it impossible.
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Conversely, if default appeared confined to one large entity like California — as was the case with New York in 1975 — the politics would probably prevent any rescue. If troubled state and municipal governments are hoping that they and their bond investors will get federal help, there is probably safety in numbers.

And what if those numbers are really frickin huge? I don't there's any safety there.

Harrisburg, the capital of Pennsylvania, dodged financial disaster last month by getting money from the state to make a payment to its bondholders.

It did so even though the state warned that the money had to be used for city workers’ pensions.

Now Harrisburg is calling on the state again. On Friday, the city said it could not meet its next payroll without money from the state’s distressed cities program.
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Worse yet, the municipal requests for state assistance could spell problems for already beleaguered state finances. One head of a municipal bond trading desk at a major Wall Street firm said he worried more about problems bubbling up from the local level than he did about the possibility of a sudden state collapse.
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Critics see little incentive for the city to take really difficult steps, like confronting public employees’ unions or taxing the nonprofit groups that own more than half of Harrisburg’s real estate but pay no property taxes.

Mr. Miller, the city controller, worries that the city will merely sell assets like parking garages and parks to generate cash for the short term without tackling its bigger structural problems.

When New York City had its financial crisis in the mid-1970s, it grabbed several life preservers that soon proved inadequate, before the state came up with tough measures that forced the city to make painful cutbacks — and, eventually, helped it to turn the corner.

Only a few places have tried to rein in their costs, by billing retirees for a portion of the premiums, for example. Retirees have responded with lawsuits, but ratings agencies and municipal bond buyers have shrugged off these warning signs.

“So far, the market doesn’t care,” said Edmund J. McMahon, the director of the Empire Center. “The market seems to assume, on the basis of nothing, that at some point all of these places are simply going to stop paying retiree health benefits.”

What is clear is that state and local governments in the US have massive public pension liabilities on their hands, and that we are not far from the point where these will impact the ability of state and local governments to operate. Given the legal protections that many states accord to liabilities, which in a number of cases derive from state constitutions, attempts to limit these liabilities with benefit cuts for existing workers will only go so far (Brown and Wilcox (2009), Novy‐Marx and Rauh (2010b)). The question going forward is one of how this burden will be distributed between urban and non‐urban areas, between state and local governments, among the more and less fiscally responsible states, and between local and federal governments. If this question remains unresolved, state and local fiscal crises may translate into losses for municipal bondholders.

That is the question investors are asking after munis — those old faithfuls of investing — took their biggest hit since the financial collapse of 2008.
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e the looming end of the Build America Bonds program, which has prompted local governments to race new bonds to market before an attractive federal subsidy is reduced.

But the big question confronting this market is how state and local governments will manage their debts. Many are staggering under huge pension and health care obligations that seem unsustainable.

Certainties are impossible because governments do not have to disclose the pension payouts they will have to make in the coming years, as they do for bond payouts.

America's strapped states and cities took another hit Wednesday, with California seeing tepid demand for its latest bond sale and other governments pulling about $700 million worth of borrowing deals this week as investors continued stepping away from the municipal bond market.

The normally staid market has grown volatile the past week, posting its sharpest selloff in nearly two years, as investors demand higher interest rates to buy paper issued by states, cities and counties to finance their operations. Localities have been hammered by a drop in tax revenue amid the downturn—and unlike the federal government, most are barred constitutionally from running deficits.

"The tax-exempt municipal bond market is a cold, cold world right now for issuers and taxpayers," Tom Dresslar, a spokesman for the California State Treasurer, said late Wednesday. He added that the state decided to cancel another $267.3 million bond sale it planned to price next week "in light of market conditions."

California's $10 billion bond sale this week was seen as a test of access for governments to the bond markets, and the middling interest signaled that municipalities could have to pay more to attract investors. The state further jolted the market by delaying the close of the bond sale, citing a lawsuit filed Tuesday that challenges a separate tactic the state is using to raise funds.